Marc Lichtenfeld has an ad running this week that talks about a business that could be the “most profitable I’ve ever seen” — and one that’s so entrenched in our country that he says the equivalent of 10% of US GDP relies on this one company.
So who is it? Well, he gets into some clues and makes it fairly clear, for an enterprising sleuth, which stock it is… but then he throws a bit of a curveball, saying that he’s got a secret way to earn income from this stock — a stock that doesn’t pay a dividend. And he says he won’t be using options or bonds or anything else income-y.
So there, intrepid Gumshoe readers, is our mystery — let’s solve it, shall we? For those who are keeping track (like us), the ad this time around is for the Oxford Income Letter ($49 first year, $79 renewals).
We’ll start with part one, which is identifying the “most profitable business” Lichtenfeld has ever seen… this is the lead-in to the ad:
“The Company That Gets Paid 2,300 Times per Second
“This business could be the most profitable I’ve ever seen.
“But you can’t collect a cent of income from it… unless you follow the exact instructions below well before January 1.
“I’m going to tell you about a single company that might just have the most profitable – and unusual – business I’ve ever seen.
“It doesn’t need retail stores.
“It doesn’t need to manufacture physical products.
“And you’ll never pay it a cent from your bank account.
“Yet, it’s found a way to collect money during every second of every day.”
So what is the business of this mysterious company? More clues:
“Safest Stream of CASH in the World
“First of all, this company controls the largest share of what is perhaps the largest market in the United States…
“Retail stores… gas stations… movie theaters… online sites… electronics… grocery stores… restaurants.
“Anytime a transaction occurs at any of these places, this company makes money….
“… it does this by collecting a small fee from the one thing that virtually every person in America and most people around the world use every day…
And it’s not one of the big credit card networks, or the banks who issue cards — it’s one of the “middlemen” in the payment processing business:
“… this company operates like a tollbooth: It helps facilitate the money distribution and, in return, it collects a small fee on every little transaction.
“You can see why our entire economy depends on the company I’m talking about today…
“While Visa, MasterCard, Discover and American Express fight for their portions of the market… this little company dominates this second part of all credit card transactions.
“The company gets paid on 74 billion transactions per year.
“It holds a near-monopoly on the entire electronic financial system. Banks and credit card companies MUST use this company’s technology.
“It controls nearly half of all electronic transactions… That includes 80% of ALL gas and grocery payments.”
So you’ve probably got an idea of who this is… particularly if you noticed the little bit about the fact that this is actually a recent IPO…
“With that much cash coming in, you’d think it was an old blue-chip stock.
“Quite the opposite, actually.
“The company just went public on October 15, 2015.
“It was the biggest IPO since Facebook… It was the biggest IPO of 2015… Yet it went public with almost no fanfare.”
So yes, he’s talking about the big payment processing company that went public in a private equity-backed IPO a couple weeks ago: First Data (FDC)
First Data was a big IPO on October 15, though the size of the IPO was nothing compared to the size of the go-private transaction when it was taken over by a private equity fund in a huge leveraged buyout almost ten years ago. But, as Lichtenfeld says, it’s a big company and a large and fairly stable business — but it doesn’t pay a dividend or generate income for you directly… so how is he getting you a “payout” from this company?
That’s part two of the tease: the “backdoor” way to earn income from this stock:
“I’m frustrated because regular investors can’t collect a dividend from this company.
“Not one cent.
“And since I’ve built my reputation on enhancing my readers’ incomes, I can’t recommend it.
“To me, it’s like finding a winning lottery ticket… and being told, ‘No, you can’t claim it.’
“Most people would have given up after finding this out.
“But not me…
“I’ve found a backdoor way to get MASSIVE income from this stock.
“I’m talking about income checks as high as $1,888… $4,720… even $9,400.
“Yet it doesn’t require options, bonds or any other less traditional income sources.
“Rather, there is a way to get special dividends – and even bigger capital gains – from one of the best businesses in America.
“But the window of opportunity could close for good as early as January 1.”
So have you guessed that backdoor yet? Here’s a bit more:
“Only about 18% of the company went public.
“You see, the rest of the company is in the hands of the lucky few who already hold private shares.
“These are the people collecting the big income payouts.
“They are selling a portion of the company because even that small amount will make them billions in cash returns.”
So what’s Lichtenfeld teasing here? Thinkolator sez he’s recommending: KKR (KKR)
Which, you may have guessed by now, is the company that set up the big leveraged buyout of First Data back in 2006, and probably the one most eager to finally “monetize” that investment with the IPO this year. KKR used to be known as Kohlberg Kravis Roberts, back in the days when they were the “Barbarians at the Gate” with their biggest ever (at that time) leveraged buyout of RJR Nabisco, and they are an investment management company specializing in private equity and leveraged buyouts, using both their own capital and the money they manage for (mostly institutional) investors.
The structure of the firm has flopped around a few times, the current iteration was publicly traded for a while in Europe but moved to a US listing in 2010 and is structured as a publicly traded partnership (so just like with MLPs, or with other investment partnerships like Blackstone, this is a tax pass-through entity and you’ll get a K-1 form for your taxes if you own this one).
KKR Does indeed pay a substantial dividend, though that has little to do specifically with the First Data investment — the dividend (I should say “distribution”, actually, since this is a partnership, not a corporation) over the last four quarters has totaled $1.68, which at the current share price ($17.61 at last night’s close) would be a yield of 9.5%. So yes, you could have earned annual income of $1,888, as teased, from KKR over the past twelve months by owning about 1100 shares (an investment of roughly $20,000). Not bad… though over the past year the share price of KKR has fallen by about 21% (a loss of five dollars or so per share), so that yield would have been little solace unless you’re confident that the share price will recover and want to hold this high-yield partnership for a longer time.
And yes, in case you didn’t want to do the math: earning income of $9,400, as per the teaser pitch, would have required an up-front investment of about $100,000 a year ago.
Many people owned KKR largely for income, the big quarterly distribution, and secondarily for their investment acumen that they think will increase the distribution over time — the same reasons they own the other huge investment management/private equity partnership, Blackstone (BX), and KKR made a move last quarter to both make investors more confident in what the distribution will be… and to cut the distribution considerably. They will be paying 16 cents per quarter as their “fixed distribution” going forward, starting with the fourth quarter, so the forward distribution yield will be much lower, about 3.6%. They also announced a big buyback authorization. (For what it’s worth, Blackstone cut their distribution considerably in this most recent quarter, too, so if they pay out similar distributions for the coming quarters that would be a yield for BX of about 5.5% versus the trailing distribution yield of 9% — but I don’t know whether BX has changed their distribution policy as substantially as KKR has, haven’t looked into that.)
Here’s what the KKR co-CEOs said at the time:
“Our announcements today, including the introductions of a fixed distribution per quarter and a share buyback program, reflect important changes to our capital management strategy. Our strong balance sheet, with approximately $14 billion in assets, allows us to support a meaningful fixed quarterly distribution. We will use incremental retained capital to invest behind our ideas and buy back our units. Over time, we think the market will value what we do with our balance sheet, including repurchasing our own units, more than the variable distributions we have been paying. These changes, coupled with continued investment performance, will allow us to create significant long-term equity value for our unitholders.”
Analyst estimates have been coming down a bit for both of those firms in recent months, though I can’t say I’ve been following them closely so I’m not sure why. So now, going forward, if you want to get a big distribution yield while having some (limited) exposure to First Data by buying KKR shares, you’d have to own about 3,000 shares (a little over $50,000) to get the hinted-at annual income of $1,888.
Which means, really, that you can take this away from being a “high yield” discussion and think about KKR solely based on its merits. They are changing the way they operate a bit, getting rid of those variable distributions, and they are continually active in setting up new investment funds and making new investments, but most of their success will depend on keeping assets under management high, which will mean, over time, that they have to keep managing money well. First Data is a small part of that, and probably not a particularly successful part — they’ve grown the business, but they also larded it up with massive amounts of debt and it took almost ten years before they could reasonably get away with taking the company public again to get some cash return… they even had to put more cash in last year to further support the company.
Overall, they look like they’re in pretty good shape — at the partnership level they have about $65 billion in investments and $16 billion in debt, though the balance sheet looks worse than that because of the large entry for “minority interest ownership,” and they did increase their borrowing this past quarter. Assets under management (AUM) continued to rise, so they have a base from which they can probably keep earning a pretty penny… it’s just that they will be dependent for good years and “exits” on how amenable the public markets are to buying IPOs at nice prices, and on bad years for opportunities to buy distressed assets, load them up with debt, and improve their operations. Can’t say that I’ve been deep into the bowels of their SEC filings, and I don’t know how much each individual investment means to their success — First Data is one of the bigger ones, but it won’t make or break them, even though they still control a large chunk.
If you check out KKR’s latest presentation for investors, you might find their plans appealing — they are focused on growing book value in the mid-teens and think that the flat distribution will help, their presentation includes a “what if” scenario: If they had had the fixed flat distribution since their US IPO in 2010, the book value would have risen to over $15 a share instead of the current $12. Of course, whether that means you want to pay 1.5X book value for the stock now, with the book value really at $12, is up to you. Just don’t buy it for high yields, or for access to First Data shares.